How Can Sri Lanka take Advantage of its Demographic Dividend?

Much has been said about Sri Lanka’s uniqueness among developing countries; no one can deny that the oldest population pyramid outside of wealthy countries.

The demographic transition implies an aging of the population, but before old-age dependency becomes an issue, there is an intermediate period of a demographic dividend when a larger proportion of the population will be at the prime working age. The success to managing the long-term age-dependency effects of the demographic transition is to use this intermediate period of demographic dividend to conserve resources for future use and to plan for a more cost-effective strategy to deal with the future age burden. This will allow older people to live a happy productive life.

The challenge is to develop a strategic approach that takes advantage of the demographic dividend period both in terms of making strategic decisions for future cost-effectiveness and save resources for future use.

Continuing the dialogue on population aging in Sri Lanka, a cross section of representatives from various civil society organizations met on 28 October 2009 to deliberate on matters pertaining to meeting this challenge and I thought of sharing with you some of the points discussed.

Sri Lanka’s history has been as a labor surplus economy and dependent on large inflows of new unskilled workers to the labor market. This is reflected in its labor intensity and low productivity levels. Sri Lanka is already experiencing the first effects of a demographic transition, which is a reduction of students in primary school and lower secondary schools. The country will soon move to the stage of fewer new entrants to the labor force creating spot labor shortages in some industries.

Could the Quality of Education be increased in a cost effective manner?

Given the early signs of a demographic transition in Sri Lanka as I mentioned with regards to education, the need for a better educated work force will rise – the challenge will be to improve education especially at the upper levels to prepare more productive workers while at the same time trying to contain fiscal costs. This will require careful planning perhaps increased use of Information Communication Technology (ICT) to improve education quality and cost effectiveness.

The increasing cost of care for non-communicable diseases

Sri Lanka can boast of a very effective health system that prevents Lankan households from being driven into poverty and serves as a functioning safety net. The aging population will create an increased burden of non-communicable diseases (NCDs) which will require more intensive medical care. There has been an increasing phenomenon of Sri Lankan medical facilities running out of medicines as demand for medication for NCDs rises. More families are being forced to buy medication at market value the phenomenon of health care costs driving households into poverty is starting to appear in Sri Lanka. Thus, families who are willing to look after elderly relatives are facing this new increased burden which may increase their reluctance to care for the elderly and forcing them into expensive institutional care at a greater economic and social cost to society.

Increased stress on the provision of Family Based Care of the Elderly

Sri Lankan social and cultural norms are geared to taking care of the elderly relatives. However, this has come under a series of challenges. First, the demographic transition itself means that there are fewer children and grandchildren to look after the elderly in each household thus each of them must bear a higher share of the costs (both time as well as out-of-pocket costs) of elderly care at a time when the costs of human capital investments needed for their children are sky-rocketing. Secondly, many working age people work overseas out of economic necessity and cannot be around to look after their children, let alone their parents. Thirdly, the increasing proportion of women who need to work to support their households reduces the principal supply of care givers. Finally, the increased out of pocket health care costs also make it hard for people to look after their elderly relatives.

Retirement should be a choice and not forced

Early retirement imposes high costs on society through lower production, lower taxation and in the case of pensionable workers longer pension payments. Of course, retirement is not really an option for the informal sector as people work as long as their health permits. [Note. One of the appeals made at the civil society meeting was to avoid the tendency to label the elderly as a homogeneous group]. But this is nevertheless an important issue for Sri Lanka as the economy gets more formalized and more and more workers come under pension coverage. A question that remains unanswered is whether healthy workers should be given incentives to continue working longer through actuarially fair changes to their pension payments and through providing suitable conditions for older workers.

Conserve the Fiscal Dividend from the demographic dividend for later use

The considerable fiscal burden of the age-dependency effect of a demographic transition can be reduced in part by taking advantage of initial period of demographic dividend. During the period, the Government will benefit from higher tax revenues and relatively low expenditures provided it can assure employment prospects for the working age population. Rather than to treat this as a fiscal windfall spend it on additional recurrent spending or tax cuts as some developed countries have done (e.g. the USA), it would be prudent to set some of the dividend aside to finance spending during the old age-dependency phase of the transition (e.g. the German approach). This will require good effective long tax and expenditure planning.

Sri Lanka has some built in advantages and disadvantages in addressing the demographic transition. It has a strong cultural tradition of family based elder care which persists to a large extent even though it is coming under challenge from changing demographics and economics.

Historically, the cost of community based or household based care of the elderly is lower and the care is generally more effective except for very acute cases. Thus, the challenge is to build on Sri Lanka’s historical tradition of family based elder care by finding ways for families to cope with the additional burden imposed by fewer care givers and cost of maintenance drugs for degenerative diseases. At the same time the country must work on diet exercise habits of the more sedentary population in order to reduce the onset of costly degenerative diseases.